Speak Now or Forever Hold Your Peace: a Legislative Proposal for Collateral Estoppel of Substituted Judgment Orders

• Publication year: 2006
• Author: By David W. Baer and Kim T. Schoknecht

SPEAK NOW OR FOREVER HOLD YOUR PEACE: A LEGISLATIVE PROPOSAL FOR COLLATERAL ESTOPPEL OF SUBSTITUTED JUDGMENT ORDERS

By David W. Baer^* and Kim T. Schoknecht^**

I. INTRODUCTION

Should a person who received proper notice of a substituted judgment petition during the conservatee's lifetime be able to contest the court-approved estate plan after the conservatee's death? The authors do not believe so and propose legislation that would help ensure the finality of substituted judgment orders.

Plainly, a trust or will executed pursuant to a substituted judgment order cannot be attacked on the grounds that the conservatee lacked testamentary capacity—the court, not the conservatee, determines that the instrument should be signed. Indeed, the fundamental purpose of the substituted judgment procedure is to provide a means to make inter vivos transfers and estate planning decisions on behalf of a conservatee precisely because he or she may no longer be competent to take these actions. But litigation is presently pending at the California trial court level in which wills and trusts executed by conservators pursuant to substituted judgment orders are being challenged on the grounds that the conservatee was subjected to fraud and undue influence, or that the conservatee was bound by contract to provide for a different distribution of the estate. The authors believe that the principle of finality of judgments—specifically, the collateral estoppel doctrine—should ordinarily bar such suits. However, no California opinions directly address the question of whether a substituted judgment order precludes subsequent litigation challenging the court-directed estate plan after a conservatee dies. There is also apparently no precedent deciding this question in the other jurisdictions that have enacted substituted judgment statutes.¹

To be sure, the validity of an estate plan is not typically adjudicated inter vivos. Since a testamentary instrument is subject to revocation or amendment at any time until the settlor's death, questions concerning the instrument's validity are usually not ripe until then.² But the nature of substituted judgment proceedings are such that the validity of the proposed instrument should be considered ripe for adjudication in that context.

First, the substituted judgment procedure affords a full and fair opportunity to litigate any issues concerning the propriety or validity of the proposed estate plan. The proceeding is initiated on notice to all persons potentially affected by the proposed action, requires the court to consider all circumstances relevant to a proposed action, provides for a full contested evidentiary hearing, does not permit default rulings, and results in an appealable order.

Second, the opportunity to litigate issues concerning the plan's validity when the conservatee is still alive affords a significant benefit compared to post mortem will and trust contests.

Third, the established principles of finality and judicial economy, discussed below, make it appropriate to treat a substituted judgment order resulting in a testamentary disposition as a final adjudication of that disposition's validity. The contrary notion that a final court order might later be determined to have directed the execution of an invalid instrument is inconsistent with another established principle—that orders are presumed to be correct.³

Persons given due notice of a substituted judgment petition, on the other hand, should have fair warning that if the court approves an action proposed in a substituted judgment petition affecting the disposition of the conservatee's estate, there will be no subsequent opportunity to attack the action when the conservatee dies and the disposition takes effect. The proposed legislation serves this purpose too.

II. DESCRIPTION OF SUBSTITUTED JUDGMENT PROCEEDINGS

Although the substituted judgment procedure has existed in the common law for more than a century, the California Supreme Court substantially expanded it in 1967, and the Legislature codified the procedure in 1979.⁴ Under revised Probate Code § 2580 et seq.,⁵ a court may, upon the petition of the conservator or any interested person, exercise its discretion to authorize or require a conservator to take any of a number of actions affecting the conservatee's estate.⁶ Using an objective "reasonably prudent person in the conservatee's position" standard, "the statute permits the court to substitute its judgment for that of a conservatee,"⁷ thereby making the court the conservatee's "decision-making surrogate."⁸

The court may issue a substituted judgment order authorizing or directing a conservator to take a proposed action for any of several purposes, e.g., to benefit the conservatee or his estate, to minimize current or prospective taxes and expenses, or to provide gifts or bequests to the conservatee's intended or likely beneficiaries.⁹ Among other things, a substituted judgment order may "make gifts of principal or income, or both, of the estate, outright or in trust"; "[c]reat[e] for the benefit of the conservatee or others, revocable or irrevocable trusts of the property of the estate, which trusts may extend beyond the conservatee's disability or life"; exercise or surrender, subject to certain limitations, the conservatee's right "to revoke or modify a revocable trust"; and, since 1995, "mak[e] a will."¹⁰

Ultimately, the procedure results in a judicial decision which, on its face, affects the substantive rights of the conservatee and other interested persons, including the beneficiaries under any instrument the court approves, the beneficiaries under prior instruments, and the conservatee's heirs. Specifically, "[t]he

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superior court's primary function under the substituted judgment statute will be to make a decision (as the conservatee would if able) on the basis of information furnished to it. . . . If there are issues of fact, the court . . . must determine . . . and then resolve any issues it deems material."¹¹ The probate court's decision, therefore, replaces the conservatee's, and, within its scope, becomes the operative decision governing the conservatee's estate.

The legislative scheme mandates five safeguards to ensure a "full and fair hearing" in reaching an appropriate decision.¹²

One, notice of a substituted judgment petition must be given to persons entitled to notice of conservatorship petitions generally, to persons entitled to notice of a petition for the appointment of a conservator, to beneficiaries (insofar as known by the petitioner) under any instrument executed by the conservatee which may have testamentary effect, and to the conservatee's intestate heirs.¹³

Two, the court must take into account all relevant circumstances bearing on the proposed action.¹⁴ Numerous factors are enumerated by statute including the conservatee's "past donative declarations, practices, and conduct"; the conservatee's "wishes"; the conservatee's "known estate plan (including but not limited to the conservatee's will, . . . and any contract . . . with provisions for payment or transfer of benefits or interests at the conservatee's death . . .)"; and "[w]hether a beneficiary has committed physical abuse, neglect, false imprisonment, or fiduciary abuse against the conservatee after the conservatee was substantially unable to manage his or her financial resources, or resist fraud or undue influence. . . ."¹⁵ The weight to be given to any particular factor depends on the circumstances, with other non-listed factors also being potentially significant.¹⁶

In assessing these factors, courts have emphasized that the decision must take into account "[t]he likelihood from all the circumstances that the conservatee as a reasonably prudent person would take the proposed action if the conservatee had the capacity to do so."¹⁷ Thus, in Conservatorship of Hart the Court of Appeal viewed Probate Code § 2583, subd. (k) as a "reaffirmation of the principle that the question in a substituted judgment proceeding is not what the conservatee would do but rather what a reasonably prudent person in the conservatee's position would do."¹⁸

Three, the Probate Court has broad discretion in deciding whether to "approve, modify and approve, or disapprove the proposed action," and to authorize or direct the conservator to take action as provided in its order.¹⁹ In particular, the interested parties are expected to provide the court with all relevant information bearing on the issues presented, and the court is expected to take evidence, by "full contested evidentiary hearing" if necessary, to resolve the material issues in reaching its decision.²⁰ Moreover, the court cannot grant a substituted judgment petition by default and must consider the merits of the proposed action on its own initiative if necessary or appropriate.²¹

Four, to order or authorize a proposed action, the court must make specific findings: that the conservatee either does not oppose the action or lacks capacity to make such a decision; and that the proposed action either will not adversely affect the estate, or the conservatee's estate remaining after the action will be adequate to support the conservatee and others legally entitled to his or her support.²²

Five, under Probate Code § 1301(d), orders on substituted judgment...